Annual report and accounts 2016

18 British Airways

18 British Airways Changing the way we fly the world “We have the ambition and we have the plan to deliver the best valuefor-money experience for all of our customers.” Alex Cruz Chairman and Chief Executive Officer of British Airways Performance £ million 2016 Higher/ lower Revenue 11,443 +1.2% EBITDAR 2,402 +12.7% Operating profit 1,473 17.8% Overview In 2016 we achieved another strong financial result despite an uncertain economic landscape and challenging market conditions. We have built a robust business plan for the future, Plan4, which will build on our solid fundamentals. The economic uncertainty created by the result of the UK’s Referendum vote to leave the EU and the subsequent weakening of the pound sterling, as well as industry overcapacity, is providing new challenges and opportunities for British Airways. We are well positioned to take advantage of the weak pound sterling with 60 per cent of our longhaul passengers originating outside the UK, enabling us to increase the mix of non-sterling revenue through the redeployment of capacity, optimising connecting flights and increasing the availability of overseas seats. We continue to develop our longhaul network, with four new routes to commence in 2017 – Fort Lauderdale, Oakland, New Orleans and Santiago de Chile – while in 2016 we launched our joint business with Qatar Airways and a codeshare agreement with China Eastern. The refresh of 18 of our Boeing 747 fleet was completed in August and continues to deliver an improved customer experience on key longhaul routes. We also undertook the biggest change yet to our check-in systems across our operation which, despite some initial instability, continues to deliver performance improvements. Plan4 Plan4 targets an operating margin of between 12 and 15 per cent each year and delivery of a sustainable RoIC of 15+ per cent through the cycle. Plan4 is built around four key pillars: • Customer: invest and innovate where customers value it most; • Operations: be safe, reliable and responsible; • Efficiency: improve capital efficiency and have competitive costs; and • People: unleash our true potential. Invest and innovate where customers value it most Plan4 will see significant investment in the customer, across all cabins, over the next five years. From January 2017, shorthaul catering quality and choice was upgraded through our new partnership with Marks and Spencer. Wi-Fi is being embodied on our aircraft from 2016, with 90 per cent of the longhaul fleet to be complete by 2019. The new British Airways app will enable customers to rebook their flights during periods of disruption, giving them greater choice and control. In Club World, our ambition is to create an experience that exceeds that of our key competitors. £400 million will be invested in Club World to transform food and drink offered to customers, deliver a step-change in service; providing more opportunities to sleep on overnight flights by changing service routines and providing new bedding and amenities. The potential for a new Club World seat is also currently being examined. On the ground, the First Wing in Terminal 5 will open in 2017, allowing First and Gold Executive Club members faster direct access to our lounges after check-in, and we will also invest significantly in our lounges at London Heathrow, Gatwick, New York JFK and Boston. Club Europe will also be reintroduced on UK domestic flights in 2017. Key statistics Punctuality 76.8% Fuel efficiency gCO 2 /pkm 97.8 British Airways targets aligned with IAG targets 20162016-2020 Lease adjusted operating margin (%) 13.3% +1.9pts 12–15% RoIC 13.5% +1.8pts 15%+ ASK growth per annum 2.6% c.2% Fleet 293 301 Be safe, reliable and responsible Operational reliability will remain a key focus over the next five years. British Airways was again more reliable than key competitors in 2016, with more on-time departures from London than easyJet and Ryanair according to Civil Aviation Authority (CAA) data. External variables, such as air traffic control, will continue to have a significant effect on our operation. In 2017 we will strengthen our operational resilience, improving punctuality through a greater focus on aircraft turnaround INTERNATIONAL AIRLINES GROUP Annual Report and Accounts 2016

19 and additional summer aircraft availability by re-timing retirements and planned maintenance. Baggage performance will also be improved, especially transfer baggage, through a new integrated baggage system and increased baggage capacity in 2017. Improve capital efficiency and have competitive costs Through execution of Plan4 management will reduce non-fuel unit costs over the next five years. A structural change programme was started in 2016and will be completed by the end of 2018, impacting all areas of the business. New technology will be utilised to automate areas of the operation and back-office functions, driving increased efficiency; IAG maintenance strategy and call centre initiatives will deliver significant savings in areas where there is substantial scope for functions to be optimised. These, along with other initiatives, will seek to streamline and simplify our operations and head office. We recently reached agreement with the NAPS Trustees on the latest triennial valuation. The low interest environment has driven up the deficit by £100 million to £2.8 billion. However, this new agreement only addresses past benefits, and we need to address the reality that low interest rates also mean costs are going to be higher for future service on defined benefit pensions. In 2017, we will be consulting with colleagues and the trade unions on future pension provision. The weaker pound sterling has made investment in aircraft, which we buy in US dollars, more expensive. As a result, we need to be, and we will be, more capital efficient with our investments. At London Gatwick, our Boeing 777 fleet will be reconfigured, with 10 seats in each row of the World Traveller cabin. The number of World Traveller Plus seats will also double to 48 whilst the Club World cabin will reduce to 32 seats. This will result in the number of seats increasing from 280 to 332 from 2018 onwards. This will ensure that we have a more competitive configuration, particularly at Gatwick, and is a more efficient way to continue to grow capacity. Our shorthaul aircraft will also be upgauged and densified. The number of Airbus 319s in our fleet will reduce from 44 to 26 by 2021 (being replaced by Airbus A320neos and Airbus A321neos from 2018), while Heathrow-based Airbus A320s will be densified to 180 seats (from 168 seats). Airbus A321s will be densified to 218 seats (up from 205 seats) starting from early 2018. Unleash our true potential Our people are vital to the successful delivery of Plan4. We have a number of people-orientated initiatives, which will develop leaders at all levels of the organisation, equipping our colleagues with the skills necessary to deliver and exceed expectations consistently. Delivering high standards of customer service is fundamental to our success. Our world class training centre, the British Airways Global Learning Academy, has continued to thrive, with 84,500 delegates receiving instruction throughout the year on 9,400 specially tailored courses to ensure our customers receive the best possible service. Digital Digital underpins British Airways’ business plan. We have a long history of digital innovation. It is over 20 years since we introduced ba.com, our first online selling capability. We created and patented the first calendar-led selling – now a travel industry best practice. More recently, we introduced a full staff mobility programme, putting relevant data in front of our crew to provide a more tailored customer service. Digital, data and technology will enable us to transform our distribution landscape and capability. Conclusion We have solid fundamentals. The four pillars underpinning our new business plan will enable British Airways to deliver our vision to be the airline of choice with personalised service, exceptional reliability, a digital mind-set and unique British style. Strategic report Corporate governance Financial statements Additional information Fuel efficiency – Our plan, our planet Fuel efficiency is important to us from both a commercial and an environmental perspective. In 2014 we set up a dedicated fuel efficiency team with experts in flight operations, network operations and engineering. In addition to the fuel savings achieved with the introduction of our newer and more efficient aircraft, the team has implemented over 41 fuel efficiency initiatives saving a total of 83,000 tonnes of fuel, and reducing our CO 2 emissions by 261,500 tonnes. The range of initiatives introduced covers all aspects of our operation including reducing weight on the aircraft, improving processes on the ground such as delaying the engine start and applying reduced engine taxiing, and working in collaboration with air navigation companies to improve airspace, and optimise routes and speeds. See pages 45 – 51 for more about Sustainability www.iairgroup.com